Music, Druidry, and Iconoclasm

Liberal Commons: Social Security

A big piece of our national commonwealth is Social Security, particularly OASDI (Old Age, Survivors, and Disability Insurance.)

Conservatism, as it has run screaming toward the Cliffs of Insanity, has put out a lot of crap about Social Security, so let’s set a few facts straight.

Social Security is not welfare.

Social Security isn’t the federal food stamp program. It isn’t Project Head Start. It isn’t the school lunch program. It isn’t national welfare.

70% of its payout is OASDI — Old Age, Survivors, and Disability Insurance — plus Medicare. You get these when you reach retirement age or become permanently disabled, after you have qualified. It takes ten years of contributing through FICA taxes to qualify for Social Security or Medicare, and what you are paid is based on how much you put in. So this isn’t available to the non-working poor. It isn’t available to illegal aliens. It isn’t available to legal immigrants who just arrived in the country.

Another 15% of Social Security is Medicaid, which is a welfare program, and is worth a separate post. It promotes public health, and is primarily intended to prevent epidemics of common third-world diseases preventable by basic medical care for those who can’t afford medical care. It protects the rich more than it serves the poor.

The remaining 15% goes to various specific groups: you can look them up, and find out what it takes to get that money.

Social Security does not tax the rich.

Social Security is funded by FICA (Federal Insurance Contributions Act) taxes, which are capped. No one pays more than $15,000 in one year — whether they make $100K or $100M that year. Investment income isn’t taxed at all, so the very wealthy, who generally collect only investment income, pay no FICA tax whatsoever.

Social Security isn’t of much use to rich people, anyway, because the piddling couple thousand a month (at best) that Social Security provides won’t even pay the catering bill for the Christmas party.

Social Security is an income redistribution system.

Social Security is not a Ponzi Scheme, nor is it a Retirement Fund, nor is it any kind of Investment Plan. I went back and read Republican Alf Landon’s speech entitled “I Will Not Promise the Moon” from 1936, and whatever he may have thought was the case in 1936, it is no longer true that Social Security is a forced savings plan.

Social Security is a straightforward income redistribution. It takes money from person A’s wages and gives it to person B.

It can be a strange trip when you talk to conservatives about this, particularly the older ones. “It’s MY money!” they’ll cry. My father used to say this, especially as he slipped into senile dementia. Well, no, it isn’t your money. Never was.

“No!” he’d protest. “It’s MY money! It’s for MY retirement! It’s my RIGHT!” He would get so angry that it wasn’t worth talking with him about it.

If you are one of these elderly conservatives who can’t bear to hear this, stop reading now. The rest of this post will only frustrate and confuse you.

For the rest of you, here’s how it works: those who are working today are taxed a fraction of their wage income by FICA. This is not income tax. This is on top of income tax. That FICA money is then immediately redistributed to all the current Social Security recipients, who are mostly retirees.

When today’s workers get to retirement age, their Social Security will be paid by the young whippersnappers who have taken over the workforce from them. When those whippersnappers retire, their retirement will be paid by their children. And so forth.

Social Security will not “go broke” in 2033.

Social Security has a Trust Fund (actually, it has several) that it uses to hold excess contributions in a calendar year, and from which it draws in short years. This trust fund does not pay for Social Security — it only supplements payments in short years. The bulk of all Social Security payments each year are paid by FICA taxes collected that same year.

The trust fund is exactly the same as your household rainy-day fund. You build it up in good months, and you spend it down in bad months.

As of April 2012, the retirement trust fund is still growing just as it has been for decades, not shrinking. In fact, here’s a breakdown of the numbers:

Income exceeded spending in 2011, so the trust fund grew. The fund is projected to grow until 2021, when it will reach its maximum of about $3.1 trillion dollars. However, in 2021 the bulk of the Baby Boomers come into retirement and stop contributing their FICA taxes, and they will place a drain on the trust fund for the next twenty-some years.

The main reason for building up the trust fund over all these years — the reason it stands at nearly three trillion dollars — is to handle the Baby Boomers when they retire. The Baby Boomers are the rainy day that the trust fund is for.

When the last Boomer passes through the pearly gates, the trust fund should be pretty much empty (actually, by law, “empty” means it has to have one year’s worth of expenditures in it). Let’s say “empty” happens 20 years from when the Boomers hit the system, or 2041. Unfortunately, according to current projections, the trust fund will be empty by 2033, about eight years short of where it needs to be. The Baby Boomers will still be draining the trust heavily when it runs dry.

What horrors need we endure to fix this eight-year projected shortfall? There are many options, the most straightforward of which is to temporarily increase the FICA tax to increase the rainy day fund.

What horrible tax rate must we endure to fix this? A 2.2% increase in FICA taxes, split between employee and employer. FICA will go from 15.3% to 17.5%. If you’re an employee, you’ll see your FICA go from 7.65% to 8.75%, and your employer will pick up the other half. Once the Boomers are through, they can reduce the rate.

Problem solved. That’s all it takes.

What’s more correct to say is that the conservatives can create a problem for Social Security in 2033 by refusing a temporary increase in FICA taxes as part of normal fiscal prudence in managing the fund. And they seem hell-bent on causing that problem.

Congress has not been stealing from the Social Security Trust Fund.

This appears, after a little bit of research, to be nothing more than some random bit of Internet propaganda that has gone around conservative circles, much like the Obamacare “death panels.” Congress has never tapped into the Social Security Trust Fund. Not ever.

Period.

I’ve heard a few people try to say it has something to do with the way Social Security has its money tied up in Treasury Bonds, and when it tries to cash those bonds, the whole financial system will go under. As near as I’ve been able to tell, this is based on confusion about the machinery of money, which is a bit complex, but fairly elegant. Some other post, perhaps.

Let me summarize all this in pithier terms:

Social security is welfare: bullcrap.

Social security taxes the rich: bullcrap.

Social security is a Ponzi scam: bullcrap.

Social security is a forced savings plan: bullcrap.

Social security is going broke: bullcrap.

Social security has been robbed by Congress: bullcrap.

I can’t say that I automatically knew these things were bullcrap. In fact, I even believed a few of them myself, until I decided to write about them and had to do some research. As it turns out, they are all 100% pure bullcrap.

So we’ve finally reached the beginning of this post. I’m sorry it took so long to get here, but I really can’t claim responsibility for how badly the conservatives and Faux News have bullcrapped up the discussion with nonsense about Ponzi schemes and Social Security going broke.

Let’s talk about what Social Security is.

Social Security is the working class taking care of the working class.

Specifically, it’s the working class young taking care of the working-class old. It’s me paying for your mother’s dentures. It’s you paying for my father’s rent.

It’s one of the benefits, and responsibilities, of citizenship in the United States. It is part of the Commons, even though it is restricted to the working middle-class.

Why is Social Security important?

Social Security is important because old age is one of the biggest crap-shoots most of us will face in our lives: how we prepare depends on when we reach the point where we can’t work any more, and how long we think we’ll live after that.

There is an old saying that there are two things forever hidden from the wisest of men: the hour of his death, and the manner of it.

Exactly how much should I have saved up on the day when I have to stop earning a living? This also is hidden from the wisest of men.

Since everyone faces this problem of uncertain late-life dependency, it is what they call an “actuarial” problem. It’s a straightforward bit of mathematics, and one of the basic rules is that the larger the group you deal with, the less the uncertainty.

When I am trying to figure it for myself, I have a group-of-one, the smallest possible group, and my risks are enormous — that I will run out of money and starve, or that I will impoverish my life by saving money that I will never live to spend. No mathematics can help me figure this out. I might as well sacrifice a goat and read the entrails. Good luck with that.

What Social Security does is to spread this uncertainty over millions of people. With a group that large, the uncertainties all but vanish. Social Security can guarantee to pay me my stipend for the rest of my life, however long it may be, and they truly do not care whether I live to be 70, or 110. They already know, statistically, how many people will die at 66, and how many at 110. They’ve planned for it.

Social Security is something called a “hedge.” It’s related to the expression “hedging your bets” as well as the term “hedge fund.” It’s a way for the community as a whole to reduce risks. It is a way for each citizen to reduce risks by participating in the community hedge.

Government isn’t the only way to manage this. Let’s look at some other ways it could be handled.

Nonsense proposals first: we again need to shovel some more right-wing bullcrap out of the way.

The Tea-Party Free Market Libertarians demand “individual responsibility.” Which translates to: “We don’t need no stinkin’ hedge. To hell with other people, I can get by on my own.”

This is exactly how it works in places like China and Colombia, as well as third-world countries. We have personal experience with Colombia, because my wife’s father lives there. There is no safety net in Colombia. His private insurance fund was embezzled by its director, and it has taken years of legal action to get the matter sorted out, during which he’s received zip. He is still receiving zip. He was a successful surgeon and general practitioner before he retired, and now he is Shit-Outta-Luck.

That’s what individual responsibility means. If anything goes wrong with your personal plans, you are SOL. You turn to begging. From family, if you have it, until they stop speaking to you. Then friends. Then charities and strangers on the street. Then you die under a bridge.

Individual responsibility also includes the individual 401K investment fund.

Your 401K tanked? You didn’t put in enough? You lived too long? Boo-hoo. Sucks to be you. Mine got 30% returns and I’m taking a cruise this year, ha-ha-ha. You screwed up, so you deserve to starve under a bridge. Here, have a mint.

I call this the “Are there no workhouses? Are there no prisons?” system of retirement. You could also call it the Sociopaths United Retirement Plan, since its main challenge is kicking the lingering elderly out of the path of the living, and investing in heavy equipment to dig their trench graves.

A slightly less antisocial fragment of the Tea Party — the States’ Rights Tea Party — wants the states to handle Social Security. It’s merely a shift of responsibility and taxation — Social Security on a state-by-state basis, rather than federal.

It will cost states exactly the same 15% on wages that the Feds currently charge, overall: federal taxes will go down by 15%, and state taxes will go up by 15%. However, since we’re talking about splitting the one system into fifty smaller systems there will be a lot of variation from state to state. States that have a younger and more prosperous average population will be able to reduce their tax rate and provide more benefits, while others will have to raise tax rates and slash benefits to stay afloat. Taxpayers in high-tax, low-payoff states will move elsewhere, making the problem in that state even worse.

There is no practical upside to splitting Social Security fifty different ways, and there are many downsides. The only reason to do this is to satisfy an irrational obsession with shrinking federal government (and bloating state government) no matter what the consequences.

The Religious Republicans want to turn Social Security over to the churches. “Americans are generous!” they say. “The most generous people in the world! Charity can work!”

Religious Republicans may be generous — though somehow that doesn’t sound right — but they clearly can’t count.

Let’s say we abolish Social Security. Every non-wealthy working person gets an immediate 7.5% reduction in taxes, and the employers that hire them suddenly find their employees are 7.5% less costly to retain. Of course, employers will immediately give that 7.5% savings back to its employees as a pay raise. Right. I’m being sarcastic. Employers will pocket the savings, and the employees will see a 7.5% rebate.

Now, each employee has to turn around and join a church, or a charitable lodge, or some other kind of collective (like the Odd Fellows used to be), and turn over that full 7.5% tax rebate to them. Right.

Those groups will turn around and redistribute this to the old folks.

But there’s a basic math problem. These charitable groups are only collecting 7.5% of the working wages of the nation, and it costs 15% to house, clothe, and feed the old folks. Where are they going to get the other 7.5%? Steal it? Double-up retires in their homes and tell them to eat half as much? Shoot every other retiree?

There’s yet another problem. Most churches want a “tithe” (10%) of their parishioners’ income just to cover overheads: the minister’s salary, the roofing fund, the sound system, the outreach program, and current charity programs. They never get that, but they push for it.

So a young family that joins a church is now going to be hit up for the tithe, plus the full 7.5% tax rebate they got from the abolition of Social Security, plus another 7.5% they don’t have. That’s 25% of their income.

You want to see churchgoers break the doors down in their rush to exit?

Of course, you can restrict your “charity” to active congregation members in good standing. This is the States’ Rights problem all over again, but times a million. Those megachurches with 5000 parishioners and a median age of 25? The old folks are going to fall on you like a tree, and you’ll be posting guards at the doors to keep them out. And the old, grey-haired Presbyterian congregations are going to have to huddle in the church basement, because they won’t have enough income among the lot of them to buy movie tickets. Without the popcorn.

This is fiscal policy by people who can’t add.

The Wall Street Republicans want Social Security privatized. What they mean by this is that they want the Social Security Trust Fund converted from T-bills to stocks. Wall Street drools over this prospect. Nearly three trillion dollars dumped into the markets! Yummy!

They promise “higher returns” than T-bills, but this is a salesman’s promise, worth less than nothing, backed by nothing. We’ve seen the horrific volatility of the stock market twice in the last decade. I think this idiocy is off the table for now. It will come back after the public has forgotten 2008 and the next trading bubble forms, but for now, I don’t think I need to say much more.

What a long list of nonsense proposals! Again, I apologize, but not one of them is mine.

So let’s at last come down to the only two proposals that make any sense.

Socialized safety-net (what we have right now), or

Privatized safety net, e.g. a pension fund.

These represent the two basic ways to set up a hedge. You either force everyone to participate, or you lock out anyone who doesn’t buy in early.

The privatized safety net simply doesn’t work very well. There are two very obvious problems.

The first is fund mismanagement, which is a polite way of saying that the fund managers wrote themselves a check and were last seen boarding a flight for Rio. How many corporate pension plans were illegally drained by their corporate sponsors? How many corporations were ever prosecuted for doing that? How many corporate pensions are left? Being privately managed means there’s a lot more opportunity for hanky-panky, and with this kind of money, there will be hanky-panky.

The other problem is that buy-in is voluntary, which is pretty much the whole point of a “private” solution. Yet it’s a simple fact of human nature that almost no one actually plans and puts out money for their own death. They don’t really even like to think about it, especially when they are young.

So no matter how you manage your pensions, you are going to end up with huge numbers of old people who never participated when they were young, and now they want in. What do you do with them?

I can’t even think about that question without hearing Eric Idle’s voice calling out “Bring ou’ cher daid! [clang]” We’re right back to Sociopaths United.

Mandatory participation — and a tax to fund it. It’s the only thing that actually makes any sense.

Best of all, that’s exactly what we have: a system put together by some very smart people who could actually count, that has been running extremely well for seventy-five years.

Social Security is one of the great American achievements of the 20th century, all the more so given the time period in which it was created, and it’s still running strong. It’s one of the commons, and our birthright as American citizens.

To the people who want to tear it down, all I can say is, “What on Earth is wrong with you?”